FTC Orders Super-Policing of Affiliates

Written by William I. Rothbard on Friday, March 9th, 2012

The Federal Trade Commission (FTC) continues to define the scope of online affiliate monitoring obligations. Last year, in Legacy Learning Systems, the FTC ordered a merchant, that was paying affiliates to post favorable product reviews without disclosure of the financial tie, to: monitor and report to the FTC about its top 50 money-making affiliates and ensure they are making the financial connection disclosure; monitor and report on a random sampling of another 50 affiliates to ensure they also disclose the connection; and terminate and stop payment to any non-complying affiliate.

This year, the FTC has laid out further its vision of compliant affiliate monitoring in much-awaited settlements of two big Internet marketing cases: Central Coast Nutraceuticals and 1021018 Alberta Ltd., d.b.a. Just Think Media and their respective head honchos, Graham Gibson and Jesse Willms. Gibson and Willms both were engaged in negative option marketing through affiliate programs. In addition to banning them for life from using negative options (a now standard FTC remedy), the FTC orders against Gibson and Willms impose super tough affiliate policing requirements that amount to a de facto ban on affiliate marketing because there is no way they can be satisfied, at least on a large scale.

The Gibson and Willms orders require one or the other of them to:
• Obtain the full name, physical address, E-mail address, phone number and bank account of every affiliate
• Provide each affiliate and affiliate network a copy of their FTC order and obtain a signed statement acknowledging its receipt
• Inform each affiliate and network that engaging in conduct prohibited by the order will result in immediate termination and forfeiture of all monies owed the affiliate
• Require each affiliate or network, prior to the use of any marketing materials, to provide all marketing materials, the URL location for the materials, the URL of any hyperlink contained in the materials, and the range of date the materials will run
• Review all marketing materials for compliance and, if they don’t comply, inform the affiliate or network that approval is denied and no payment will be made for sales coming from those materials
• Thoroughly investigate any complaint against an affiliate or network
• Immediately terminate and stop paying any affiliate or network who they learn is violating the order
• Refund, within 5 business days, each consumer whose sale came from a non-compliant affiliate or network

On the surface, these requirements don’t seem particularly unreasonable. What’s wrong with getting affiliates’ addresses and making sure they use truthful ads? Online merchants, however, often work with hundreds of affiliates, or with networks consisting of hundreds or thousands of sub-affiliates, many dispersed on far-away continents. Affiliate ads can be changed in a keystroke, making monitoring of their every iteration impossible.

Faced with such obligations applicable to globe-spanning networks (including the refund liability), why would Gibson or Willms, or any merchant, want to engage in affiliate marketing? The obvious answer (if they’re sane) is, they wouldn’t.

Affiliate misconduct occurs, and the FTC has a legitimate interest in encouraging and, where necessary, forcing merchants and networks to make reasonable efforts to deter it. Prompt termination of known bad actors is appropriate and should be required, as in Legacy Learning. The super-policing ordered in these cases, however, is, as a practical matter, impossible for any merchant, even the most compliance-conscious, to carry out, at least on any sizable scale.

Rather than pretending Gibson and Willms could still engage in affiliate marketing if they would “just comply” with these requirements, it would have been more honest for the FTC to ban them altogether. And if these policing duties are what the FTC expects of all online merchants and affiliate networks, then the FTC should be even more direct and just announce a complete ban on affiliate marketing by everyone.